New Economics Papers
on Risk Management
Issue of 2012‒02‒27
six papers chosen by

  1. Macroprudential policies in an agent-based artificial economy By Marco Raberto; Andrea Teglio; Silvano Cincotti
  2. Managerial Overconfidence and Corporate Risk Management By Tim R. Adam; Chitru S. Fernando; Evgenia Golubeva
  3. Cubrir o no Cubrir: ¿Ese es el Dilema? By Rodrigo Alfaro; Natán Goldberger
  4. Why Do Firms Engage in Selective Hedging? By Tim R. Adam; Chitru S. Fernando; Jesus M. Salas
  5. A Market for Weather Risk ? Conflicting Metrics, Attempts at Compromise and Limits to Commensuration. By Isabelle Huault; Hélène Rainelli-Weiss
  6. Active margin system for margin loans and its application in Chinese market: using cash and randomly selected stock as collateral By Guanghu Huang; Wenting Xin; Weiqing Gu

  1. By: Marco Raberto (University of Genova (Genova, Italy)); Andrea Teglio (Department of Economics, Universitat Jaume I (Castellón, Spain)); Silvano Cincotti (University of Genova (Genova, Italy))
    Abstract: Basel III is a recently-agreed regulatory standard for bank capital adequacy with focus on the macroprudential dimension of banking regulation, i.e., the system-wide implications of banks' lending and risk. An important Basel III provision is to reduce procyclicality of present banking regulation and promote countercyclical capital buffers for banks. The Eurace agent-based macroeconomic model and simulator has been recently showed to be able to reproduce a credit-fueled boom-bust dynamics where excessive bank leverages, while benefitting in the short term, have destabilizing effects in the medium-long. In this paper. we employ the Eurace model to test regulatory policies providing time varying capital requirements for banks, based on mechanisms that enforce banks to build up or release capital buffers, according to the overall conditions of the economy. As conditioning variables for these dynamic policies, both the unemployment rate and the aggregate credit growth have been considered. Results show that the dynamic regulation of capital requirements is generally more successful than fixed tight capital requirements in stabilizing the economy and improving the macroeconomic performance.
    Keywords: Basel III, macroprudential regulation, agent-based models and simulation
    Date: 2012
  2. By: Tim R. Adam; Chitru S. Fernando; Evgenia Golubeva
    Abstract: We show that managerial overconfidence, which has been found to influence a number of corporate financial decisions, also affects corporate risk management. We find that managers increase their speculative activities using derivatives following speculative gains, while they do not reduce their speculative activities following speculative losses. This asymmetric response follows from selective selfattribution: successes tend to be attributed to one’s own skill, while failures tend to be attributed to bad luck. Thus, our results show that managerial behavioral biases can also impact corporate risk management.
    Keywords: corporate risk management, behavioral biases, managerial overconfidence, speculation
    JEL: G11 G14 G32 G39
    Date: 2012–02
  3. By: Rodrigo Alfaro; Natán Goldberger
    Abstract: In this paper we analyze if currency hedging reduces risk. Based on historical data (1997- 2011) and using coherent measures of risk, we found that in equity portfolios it does not imply a reduction on risk. In contrast, for fixed-income portfolios the optimal hedging is 100%. Last finding is also robust to both USD and EUR portfolios
    Date: 2012–02
  4. By: Tim R. Adam; Chitru S. Fernando; Jesus M. Salas
    Abstract: Surveys of corporate risk management document that selective hedging, where managers incorporate their market views into firms’ hedging programs, is widespread in the U.S. and other countries. Stulz (1996) argues that selective hedging could enhance the value of firms that possess an information advantage relative to the market and have the financial strength to withstand the additional risk from market timing. We study the practice of selective hedging in a 10-year sample of North American gold mining firms and find that selective hedging is most prevalent among firms that are least likely to meet these valuemaximizing criteria -- (a) smaller firms, i.e., firms that are least likely to have private information about future gold prices; and (b) firms that are closest to financial distress. The latter finding provides support for the alternative possibility suggested by Stulz that selective hedging may also be driven by asset substitution motives. We detect weak relationships between selective hedging and some corporate governance measures, especially board size, but find no evidence of a link between selective hedging and managerial compensation.
    Keywords: Corporate risk management, selective hedging, speculation, financial distress, corporate governance, managerial compensation
    JEL: G11 G14 G32 G39
    Date: 2012–02
  5. By: Isabelle Huault (DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris IX - Paris Dauphine); Hélène Rainelli-Weiss (DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris IX - Paris Dauphine)
    Abstract: In this paper, we examine the process of risk commodification involved in the creation of a market for weather derivatives in Europe. We approach this issue through an in-depth qualitative study in which we focus on the commensuration process by which promoters try to draw weather risk into the financial world. By offering a concrete description of a derivatives market as a meeting place between different metrics, our results highlight the failure of a process of commensuration - a phenomenon rarely studied empirically in the literature - and its unexpected results. Compared to existing research, we use the theoretical framework provided by Boltanski and Thévenot (2006) to enrich the literature on commensuration specifically as regards the different forms of agreement to which commensuration attempts can lead. Our results highlight the crucial role of a common interest for commensuration to succeed, and the conditions necessary for this common interest to occur. We conclude that there are limits to the thesis of financial theory, according to which all kinds of risk can be transformed into financial risk, and exchanged on financial markets.
    Keywords: commensuration, compromise, derivatives market, risk commodification, social studies of finance
    Date: 2011
  6. By: Guanghu Huang; Wenting Xin; Weiqing Gu
    Abstract: An active margin system for margin loans is proposed for Chinese margin lending market, which uses cash and randomly selected stock as collateral. The conditional probability of negative return(CPNR) after a forced sale of securities from under-margined account in a falling market is used to measure the risk faced by the brokers, and the margin system is chosen under the constraint of the risk measure. In order to calculate CPNR, a recursive algorithm is proposed under a Markov chain model, which is constructed by sample learning method. The resulted margin system is an active system, which is able to adjust actively with respect to the changes of stock prices and the changes of different collateral. The resulted margin system is applied to 30,000 margin loans of 150 stocks listed on Shanghai Stock Exchange. The empirical results show the number of margin calls and the average costs of the loans under the proposed margin system are less than their counterparts under the system required by SSE and SZSE.
    Date: 2012–02

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